Business Guide to Coronavirus Stimulus Package: Tax Breaks
Besides business loans, the federal government is giving aid to businesses and non-profits for the Covid-19 pandemic in the form of tax breaks. Here is a summary of the key provisions that can help your company or non-profit navigate through the coming months. Request Consultation
For most companies, the most notable tax relief under the CARES Act relates to payroll taxes coming due from April 1, 2020 – December 31, 2020. There are two categories, each with slightly different benefits and criteria.
Employee Retention Tax Credit
There is a «refundable tax credit» equal to 50% of employee compensation available to all businesses, both big and small, that _
(i) continue to pay their employees
(ii) do not receive Paycheck Protection loans
(iii) have been fully or partially suspended as a result of government order OR suffered a 50% reduction in quarterly receipts due to the Coronavirus crisis
Amount of Credit
Businesses with fewer than 100 employees – May claim a credit for wages paid to employees, with a cap of $10,000 per employee.
Businesses with more than 100 employees – Get a credit for employees who are furloughed or whose hours are reduced as a result of business closure or economic hardship.
Applying for the Tax Credit
So, what is a “refundable tax credit”? How does this actually work?
When you file your company’s quarterly payroll tax, you can take a credit equal to 50% of what you pay employees. If the credit you claim is greater than the tax liability, you will receive a refund for the difference.
What are the limitations?
There are no restrictions on business size. You do have to meet the three criteria above, though.
Payroll Tax Delay
You know the employer portion of the payroll taxes you normally have to pony up every pay cycle? Under the CARE Act, your business can defer those payments through the end of 2020. In effect, the delay is like an interest-free loan.
(i) continue to pay employees
(ii) do not take a Paycheck Protection loan
The deferred payroll taxes can be paid back in two installments. The first half (50%) is due by December 31, 2021, and the second half (50%) by December 31, 2022.
Defer-able Portion of Payroll Taxes
Your company can defer all of the following:
– employer portion of FICA taxes
– employer and employee representative portion of Railroad Retirement taxes
– half of SECA tax liability
Other portions of your company’s payroll taxes, such as amounts charged by your State, are not affected by the CARE Act.
Advance Payment of Tax Credits for Paid Leave
If your business is required to provide paid leave to employees due to the Families First Act, then you may be wondering how you can afford that. This may help.
The CARE Act allows the US Treasury to send advance payments of tax credits. The details are still sketchy, but it appears the calculation will be based on a projection as follows:
Company liability for payroll taxes minus Payroll Tax Credits available under CARE Act =
(A) remaining amount due to be paid to the IRS
(B) excess credit due to the company
If, in your case, the result is (B), then you can apply to have the refund sent to you in advance. Having those funds in-hand may help your company meet its obligations to pay for employee leave during the crisis.
The emergency paid leave provisions go into effect April 1, 2020. For more details on your company’s obligations under Families First Coronavirus Response Act, click here.
Net Operating Losses
The Tax Cuts and Jobs Act of 2017 put restrictions in place regarding Net Operating Losses (NOLs), such as (i) limiting NOLs to 80% of taxable income, and (ii) eliminating NOL carrybacks to prior years. The CARE Act modifies these restrictions . . . in your favor.
Your business can now carryback NOLs for the last five (5) years, meaning 2015 to 2020. This effectively delays the 80% taxable income limitation until 2021, while at the same time providing retroactive relief for the past five (5) years.
First, your business can now deduct its NOLs up to 100% of taxable income, as opposed to be limited to 80%. Second, for taxable years after 2021, the business can write off all its NOLs for tax years prior to 2018. Finally, your business can take a deduction up to 80% of modified taxable income for NOLs arising in tax years after 2017.
Other Limitations on Losses (less common)
The CARES Act retroactively suspends the current rule that limits deductible business losses. The limitations were previously effective as of 2018 but have now been pushed back to 2021. The same is true for active farming loss rules.
Corporate Alternative Minimum Tax
The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully refundable and also provides an election to accelerate claims to 2018. Previously, there were limits to how much AMT credit a corporation could take.
Business Interest Deduction
The CARE Act permits businesses to elect to increase the interest limitation from 30 percent to 50 percent of ATI for 2019 and 2020. Further, businesses may elect to use 2019 ATI in calculating their 2020 limitation. There is a special rule for partnerships, which allows 50 percent of any excess business interest allocated to a partner in 2019 to be deductible in 2020, rather than being subject to the ATI limitation. The remaining 50 percent of excess business interest from 2019, however, is subject to the ATI limitation.
This one may interest our clients who own restaurants or commercial building, as well as those in real estate investment (i.e. fix and flip). The CARE Act will permit you to immediately deduct the expenses of property improvements or depreciate over 20 years. Previously, you had to depreciate over 39 years.
Alcohol Taxes on Hand Sanitizer
The CARES Act exempts undenatured spirits from excise taxes for those distillers that are producing hand sanitizer on an emergency basis.
So, what is our take-away from all of this? For one thing, you are going to be spending some quality time with your accountant and/or tax attorney. Beyond that, my feeling is that these tax benefits will be of great interest to businesses that have done well in past years and do not really need or want business loans. For a lot of businesses that are «at risk,» these tax breaks may not be enough.
Understanding the interplay between the available business loans, tax breaks, paid leave obligations and unemployment benefits is the whole game at this point. You have to weigh your options and make the best choices you can for your business.